Selling Property...living off the proceeds!

kwackerman

Hi All, Probably the wrong forum but here's my question.

My father ( 72) is just about to stop work and start relaxing. He is worried that he won't have enough income from his private and state pension to afford the reasonable lifestyle he is used to.
He is considering selling his property ( worth roughly £180-200K) and using the money to update his car etc, give a little bit to his 4 kids, then move to an area he has always wanted to live in ( the Cotswolds) using the rest of the money to prop up his pension and rent a small cottage to live out the rest of his days in relative comfort. With the amount in question and the cost of rents etc in the area he should have enough to see him through to at least the ripe old age of 95?!
What are the tax implications of this idea? Are there any other implications regarding state care should he need to go into a retirement home at some point in the future?
Any help and advice would be gratefully received.

Cheers
Andy

puddy

the thing i would worry about is whether renting would make him vulnerable at his age. what if the landlord decides he wants to sell and th new owner doesnt want a tenant, so he moves on, then the next landlord does the same and so on. there is no security

also, is he planning to get rid of his property so that if he needs benefits he will qualify? what about possible care needs? how much does he plan to give the kids and spend on his car?

personally i would have thought the cotswolds was very expensive

Yorkie1

I agree with the concern about renting - it is not a safe, secure option. You are at the whim of a LL who may, or may not, be a good LL. Rent may go up more than the cost of living. Your father could be asked to leave at relatively short notice.

atush

Renting is not safe for a vulnerable pensioner. If he sells his house he should buy a flat or small cottage in a cheaper area. And not too far out in the country as he will need transport to get around. He needs to be in or on the outskirts of a town.

If he can sell for 180K, and buy a place for 100K he could suppliment his pension with 80K.

Lois_and_CK

To reply to your question about tax implications, I would guess at the following (these are just assumptions though as I'm not an expert and could well have this wrong).

There would be a large lump sum of money that would need to be put into some sort of savings vehicle. A proportion could be protected from tax by using ISAs and premium bonds, but with the rest in savings accounts/bonds etc. I think the money that's put in normal savings accounts would be subject to tax on the interest your father earns on it. Each year your father could shift money from his savings into an ISA and fill his ISA allowance though.

The other tax implication is that the income he would need would go up in order to pay the added bill of rent, so the income over his tax-free allowance will be higher than if he stayed in a mortgage-free property, meaning that the amount of income that is subject to tax would then be higher. If he took his income from savings then he'd pay tax on it, but I think if he took his income from ISAs then it would tax free (I'm a bit woolly on this though).

Like I say, these are just my guesses and I could be wrong. Hopefully someone else will come along and clear up any mistakes I've made. I wanted to try and answer your specific question about tax implications though as everyone else has just pointed out that renting might leave your father in a vulnerable position. It might, but he could also consider renting in an assisted living place if that's a worry?

atush

My MIL and FIL downsized into an assisted living facility and banked the rest of the money from the sale and used it to suppliment their pension. This ouwld be the best way to go if you could find one your father likes in an area he likes.

Single men can be very popular there lol.

jamesd

Taking 7% income, deliberately reducing capital value gradually, would produce an income of around £12,500 from a £180,000 pot. The income is generally taxable but things can be done to reduce the tax.

Top priority would be placing interest-producing investments like corporate bond funds within a stocks and shares ISA because interest in an ISA isn't taxable. Using the full allowance each year he should be able to gradually reduce his potential tax bill. 6-7% income with no tax should be possible from these.

Rather than using lump sums, he might consider making regular payments to his children out of his income. This avoids inheritance tax potential (unlimited gifts out of normal income are fine) and leaves him with the flexibility to retain more of the money if he finds that he has a need for it.

He might consider a little use of venture capital trusts (VCTs) because there's tax relief of 30%, limited to the actual tax paid in the year. The income is tax free for as long as the investment is held. The tax relief has to be repaid if the investment is sold within five years, except on death. No capital gains tax to pay. A little use means perhaps £5,000 to £10,000 for a few years then stopping, so it doesn't become an excessively large part of his mixture. They are fairly high risk investments so no more than about 5-10% is appropriate.

Since your father is still working he could usefully consider making a pension contribution up to his full income this year. That will get him tax relief and he could then take out a 25% lump sum shortly afterwards. There's a limit of £50,000 per year with some carry over allowed from up to three past years, say if this limit is a potential issue and we can say more about the rules.

How much other income does he have? Does he have any workplace final salary pension income? Any defined contributions pension pots? His total assets and income are significant for planning purposes, since they affect the tax treatment and how much money can sensibly be used in various ways. Depending on his anticipated expenses and income and how much he likes or dislikes annuities he might consider gradually buying some annuity income as he gets older, perhaps £10,000 worth a year - but not now, it's a horrible time to buy an annuity. One possible drawback for annuities is that once purchased the capital is gone and can't be inherited.

To smooth his income he'd probably be wise to have a year or two's worth of income in a savings account with a standing order set up to pay his current account each month. He can arrange his investments to pay into the savings account to top it up whenever the income happens to be due, with out having to wonder about just when it arrives.

Renting can be ideal for a pensioner with a suitable income because it's very flexible. Landlords generally like long term and reliable tenants so while there is a risk that a landlord would want him to leave, he can sign regular two year contracts, updating each year, so he'd have at least a year to find another place. Meanwhile he'd have flexibility to try different areas if he wanted to have variety or just explore.

There are things that can be done to protect capital for inheritance against care fees but how significant this is depends in part on his total income. He may have sufficient income that he could cover likely fees anyway, we don't yet have enough information to know. An investment bond can be used to force him to use whatever homes the council is willing to pay for by protecting his capital for inheritance but he may prefer to spend some capital to live in a better place while he can appreciate the better quality. It's likely to cost at least £25,000 a year, perhaps as much as £35,000, so if his income is over say £20,000 he may find that he doesn't need to worry about care home fees because his capital could pay them for a long time without serious effect. If his income is over £35,000 he may simply be able to pay out of normal income with no capital drain at all.

Given the sums involved he should really discuss his plans with an IFA from unbiased.co.uk who can consider how much up and down movement of capital value (often called risk) he's prepared to accept and discuss how to invest efficiently. He should be wary of investment bonds, the amount involved here doesn't really seem sufficiently high to make that method pay compared to moving money into an ISA as fast as possible and taking dividend and capital income from the rest until he can move it. IFA charges vary so he should shop around both on price and on service and how comfortable he is with each.

kwackerman

Thanks for your thought's and advice.........he has a lot to consider!